The Market Breaks Down

January 17, 2008

Today’s action in the market, made is seem quite apparent that investors decided to take what ever they had left in the market and just go home. Bernanke spoke before congress and didn’t assuage investor’s fears about what may lie ahead for the markets. In fact, he stated that we were unlikely to go into a recession, and that the economy would probably recover later in the year. While one might think that by Bernanke stating we are not heading into a recession, would help matters, it actually did just the opposite in that he created greater angst among investors when he didn’t state the obvious. This translates into one thing for investors and that is, he won’t be as aggressive as investors were hoping for in cutting rates. So as a result, we get a day where the general markets sell off 2%-3%.

We may eventually get a surprise rate cut from the Fed, or they may just choose to wait for another week and a half (which is likely what they will do) before cutting rates by a certain amount. At this point we believe that the Fed will cut by 50 basis points. The Fed historically doesn’t move quickly and we don’t expect them to go from cutting rates by 25 basis points to 75 or 100 basis points. But we will cover this subject more as we get closer to the Fed meeting.

Tomorrow is options expiration day, and the volatility should be significant. However expect for tomorrow to be another day in the red, as historically the market tends to fare horribly when options contracts expire in the month of January. In fact, out of the last nine years, the market has had major declines in eight of them, so our faith in a dead cat bounce tomorrow, though possible, is not likely.

Let’s review the charts…

The NASDAQ withstood the sell-off by investors today much better than its counterparts but not by much. The index closed down on the day about 2%. The next stopping ground for the NASDAQ will most likely be the March lows. At that point, it will need to find some support before recovering. But there is no guarantee in this, and could just end up being a stopping point before trending further downward.

S&P had a horrendous day to say the least. After breaking its March lows, it can be said with near certainty that the index is in free-fall mode. Trying to catch this falling knife, so to speak, is likely to be very hazardous for your portfolio’s health. Nonetheless, the index is at a point where a bounce is likely in the cards, but timing one is ill-advised. If you are short, don’t panic over a 1%-2% bounce across the board. Especially if the Fed announces surprise rate cuts.